Lease Accounting

mRoyalty is an amount payable to the owner of an asset for
the right to use it, payment varying with usage.
mRoyalty is a periodic payment to the owner of an asset for

use of his ownership rights. In other words, it is
compensation made to the owner of an asset in exchange
for the right to use the asset. Owner of the asset is termed
as landlord. User of the asset is termed as lessee.
mEg:- for landlord includes lessor, patent owner, author etc

mEg:- for lessee includes licensees, publisher etc
6

ë dased on production/output
Charged to manufacturing or production or
Trading a/c
ë dased on sales
Charged to Profit and loss a/c
©
ë Mining royalties
ë Patent royalty
ë Copyright royalties
Mining royalty and patent royalty are usually payable
on the basis of output, whereas, the copy right
royalties are usually payable on the basis of sales
Note: A lump sum payment for the outright purchase of
a patent, mine, or book is not treated as royalty but it
is a capital expenditure and are recorded as fixed asset.
© 6
. Minimum rent/ Dead rent/ Fixed Rent
It is the minimum amount payable by the lessee to
the lessor in a particular period irrespective of the
production or sales
2. Short working/ Recoverable dead rent
The excess of minimum rent over actual royalty
calculated on the basis of output or sales
Eg Kalyani publishers printed a book on advanced accounting
at minimum rent of Rs a . Royalty being payable at the
rate of 8/copy sold and the number of copies sold during the
period was 2000.In this example the short working is Rs 4000.
2 6
ë The lessor promises to return the excess so charged in
the first few years out of the excess earned in the later
years. The right of getting back the excess payment
made in the earlier years is called right of recoupment
of short working
ë The right of recoupment of short working can be
a) Restricted (Fixed)
b) Floating (Fluctuating)
6

ë Restricted (Fixed)right of Recoupment of short
working
When the lessor promises to compensate the loss
only in the first few years is said to be restricted
(fixed).
ë Floating (fluctuating) right of Recoupment of short
working
When the lessor promises to compensate the loss
of any year in the next/subsequent/following, then the
right is termed as Floating (Fluctuating)
6

ë Short working should be carried forward and shown in
the balance sheet as current asset so long as they are
recoverable
ë Short working which could not be recouped during the
allowed period of recoupment should be closed by
transferring to P&L a/c
Note: The question of short working or its recoupment
does not arise if the royalty agreement does not
contain a clause of minimum rent.

ë Stage . When royalty is less than the minimum rent
(Short working Irrecoverable)
. For amount becoming due to landlord
Royalty a/c Dr (with actual royalty earned)
Short working a/c Dr (with the difference)
To Landlord a/c (with minimum rent)
2. For payment to the Landlord
Landlord a/c Dr
To dank a/c

2. For closing royalty account
P&L a/c/ Production a/c Dr
To Royalty a/c
4. For writing of short working
Profit & Loss a/c Dr
To short working a/c
Note . Where there is minimum rent clause and also the royalty payable is
less than the minimum rent only then Minimum rent account is
opened. When royalty payable exceeds minimum rent then
minimum rent a/c is not written up.
Note 2.Where there is no minimum rent clause, the question of short
working does not arise and no need to open minimum rent account.
x

!
1. For amount becoming due to the Landlord
Royalty a/c Dr (with actual royalty earned)

To Landlord a/c (with actual royalty earned)
2. For recouping short working, if any

Landlord a/c Dr ( with the amount recouped)
To short working a/c (with the amount recouped)
3. For payment to the Land lord
Landlord a/c Dr (with the net amount paid)
To Bank a/c (with the net amount paid)
4. For closing the Royalty account
P&L a/c/production a/c Dr
To Royalty a/c
5. For writing off irrecoverable short working
P & L a/c Dr
To short working a/c

"

Stage I: When royalty receivable is less than the

minimum rent (Short working Irrecoverable)
. For the minimum rent becoming receivable
Lesseeǯs a/c Dr (with minimum rent)
To Royalty receivable a/c(with actual royalty)
To Royalty suspense a/c (with the difference)
2. For the amount received
dank a/c Dr
To Lesseeǯs a/c
2.For closing the royalty receivable and Royalty suspense a/c
Royalty Receivable a/c Dr
Royalty suspense a/c Dr
To P & L a/c
x

!
. For amount becoming due
Lesseeǯs a/c Dr
To Royalty receivable a/c
2. For recouping the short working by the lessee
Royalty suspense a/c Dr
To Lessee a/c
2. For the amount received
dank a/c Dr
To Lessee a/c
4. For closing the royalty receivable account
Royalty receivable a/c Dr
To P & L a/c
5. For transferring (after the expiry of right) the irrecoverable short working
Royalty suspense a/c
To P & L a/c

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mRoyalty is an amount payable to the owner of an asset for

the right to use it, payment varying with usage.

mRoyalty is a periodic payment to the owner of an asset for

mEg:- for landlord includes lessor, patent owner, author etc

Royalty a/c Dr (with actual royalty earned)

2. For recouping short working, if any

Stage I: When royalty receivable is less than the

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